December 2012 Philippine Supreme Court Decisions on Commercial Law

Here are select December 2012 rulings of the Supreme Court of the Philippines on commercial law:

Corporations; liability of corporate officers. Settled is the rule that debts incurred by directors, officers, and employees acting as corporate agents are not their direct liability but of the corporation they represent, except if they contractually agree/stipulate or assume to be personally liable for the corporation’s debts, as in this case.  Ildefonso S. Crisologo vs. People of the Philippines and China Banking Corporation, G.R. No. 199481, December 3, 2012.

Rehabilitation; purpose. Rehabilitation is an attempt to conserve and administer the assets of an insolvent corporation in the hope of its eventual return from financial stress to solvency. It contemplates the continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and liquidity. The purpose of rehabilitation proceedings is precisely to enable the company to gain a new lease on life and thereby allow creditors to be paid their claims from its earnings.

Rehabilitation shall be undertaken when it is shown that the continued operation of the corporation is economically feasible and its creditors can recover, by way of the present value of payments projected in the plan, more, if the corporation continues as a going concern than if it is immediately liquidated. Express Investments III Private Ltd. and Export Development Canada Vs. Bayan Telecommunications, Inc., The Bank of New York (as trustee for holders of the US$200,000,000 13.5% Seniour notes of Bayan Telecommunications, Inc.) and Atty. Remigio A. Noval (as the Court-appointed Rehabilitation Receiver of Bayantel). G.R. Nos. 174457-59/G.R. Nos. 175418-20/G.R. No. 177270. December 5, 2012

Rehabilitation; priority of secured creditors. The resolution of the issue at hand rests on a determination of whether secured creditors may enforce preference in payment during rehabilitation by virtue of a contractual agreement.

The principle of equality in equity has been cited as the basis for placing secured and unsecured creditors in equal footing or in pari passu with each other during rehabilitation. In legal parlance, pari passu is used especially of creditors who, in marshaling assets, are entitled to receive out of the same fund without any precedence over each other.

The Court laid the guidelines for the treatment of claims against corporations undergoing rehabilitation:

1. All claims against corporations, partnerships, or associations that are pending before any court, tribunal, or board, without distinction as to whether or not a creditor is secured or unsecured, shall be suspended effective upon the appointment of a management committee, rehabilitation receiver, board, or body in accordance with the provisions of Presidential Decree No. 902-A.

2. Secured creditors retain their preference over unsecured creditors, but enforcement of such preference is equally suspended upon the appointment of a management committee, rehabilitation receiver, board, or body. In the event that the assets of the corporation, partnership, or association are finally liquidated, however, secured and preferred credits under the applicable provisions of the Civil Code will definitely have preference over unsecured ones.75 (Emphasis supplied)

Express Investments III Private Ltd. and Export Development Canada Vs. Bayan Telecommunications, Inc., The Bank of New York (as trustee for holders of the US$200,000,000 13.5% Seniour notes of Bayan Telecommunications, Inc.) and Atty. Remigio A. Noval (as the Court-appointed Rehabilitation Receiver of Bayantel). G.R. Nos. 174457-59/G.R. Nos. 175418-20/G.R. No. 177270. December 5, 2012

Rehabilitation; constitutionality of pari passu treatment. Petitioners submit that the pari passu treatment of claims offends the Contract Clause under the 1987 Constitution.

Article III, Section 10 of the Constitution mandates that no law impairing the obligation of contracts shall be passed. Any law which enlarges, abridges, or in any manner changes the intention of the parties, necessarily impairs the contract itself. And even when the change in the contract is done by indirection, there is impairment nonetheless.

The prohibition embraces enactments of a governmental law-making body pertaining to its legislative functions. Strictly speaking, it does not cover the exercise by such law-making body of quasi-judicial power.

Verily, the Decision dated June 28, 2004 of the Rehabilitation Court is not a proper subject of the Non-impairment Clause. Express Investments III Private Ltd. and Export Development Canada Vs. Bayan Telecommunications, Inc., The Bank of New York (as trustee for holders of the US$200,000,000 13.5% Seniour notes of Bayan Telecommunications, Inc.) and Atty. Remigio A. Noval (as the Court-appointed Rehabilitation Receiver of Bayantel). G.R. Nos. 174457-59/G.R. Nos. 175418-20/G.R. No. 177270. December 5, 2012

Rehabilitation; power of Monitoring Committee to manage operations. The management committee or rehabilitation receiver, board or body shall have the following powers: (1) to take custody of, and control over, all the existing assets and property of the distressed corporation; (2) to evaluate the existing assets and liabilities, earnings and operations of the corporation; (3) to determine the best way to salvage and protect the interest of the investors and creditors; (4) to study, review and evaluate the feasibility of continuing operations and restructure and rehabilitate such entities if determined to be feasible by the Rehabilitation Court; and (5) it may overrule or revoke the actions of the previous management and board of directors of the entity or entities under management notwithstanding any provision of law, articles of incorporation or by-laws to the contrary.

In this case, petitioner neither filed a petition for the appointment of a management committee nor presented evidence to show that there is imminent danger of dissipation, loss, wastage or destruction of assets or other properties or paralyzation of business operations of respondent corporation which may be prejudicial to the interest of the minority stockholders, the creditors or the public. Unless petitioner satisfies these requisites, we cannot sanction the exercise by the Monitoring Committee of powers that will amount to management of respondent’s operations. Express Investments III Private Ltd. and Export Development Canada Vs. Bayan Telecommunications, Inc., The Bank of New York (as trustee for holders of the US$200,000,000 13.5% Seniour notes of Bayan Telecommunications, Inc.) and Atty. Remigio A. Noval (as the Court-appointed Rehabilitation Receiver of Bayantel). G.R. Nos. 174457-59/G.R. Nos. 175418-20/G.R. No. 177270. December 5, 2012

(Hector thanks  Dianne Caroline V. Ducepec, Dianne Margarette T. De los Reyes, Grace Ann C. Lazaro and Maria Angelica A. Paglicawan for their assistance to Lexoterica.)

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